“Irrevocable undertaking” to pay adverse costs not enough to defeat security application

Costs: claimant’s owner may prefer to let the defendant wait for its costs

An irrevocable undertaking by a claimant company’s owner to pay adverse costs is not equivalent to after-the-event (ATE) insurance and so not enough to defeat an application for security for costs, the High Court has ruled.

Dunn Motor Traction Limited v National Express Limited [2017] EWHC 228 (Comm) concerns the premature ending of a contract, with the claimant seeking £20m in lost profits.

The claim is set down for trial for 12 days in January 2018. The defendant’s costs are estimated at about £1.8m, and it sought security of £975,000. Such was the effect of the termination of the contract on the claimant’s financial health that it conceded there was reason to believe it could not pay an interim payment on account of costs if it lost.

The claimant’s sole shareholder, Mr Dunn, has provided an irrevocable undertaking to indemnify the claimant in respect of its costs liability, and it argued that this was akin to cases that have held that the existence of an ATE insurance policy satisfies security.

However, Mr Justice Teare did not accept the analogy. Having reviewed the case law, he said the starting point of the approach to ATE policies was that they were a “reliable source of litigation funding” – this could not be said of an indemnity like this.

“The counterparty to an ATE policy is a ‘responsible and reputable insurer’. By contrast the sole shareholder of a claimant company is, in a practical sense (though not of course in the strict legal sense), the adversary of the party seeking security for its costs.”

Further, whereas ATE policies were now “a central feature of the ability of parties to gain access to justice” – as stated by Mr Justice Stuart-Smith in the 2013 case of Geophysical Service Centre v Dowell Schlumberger – Teare J said “indemnities provided to a company by its owner in respect of the company’s liability to pay legal costs are not so regarded”.

He continued: “In my judgment, the question which must be asked on an application for security for costs against a company, assuming that there is no ATE policy, is whether there is reason to believe that the company will be unable to pay the costs of the defendant if ordered to do so.

“I accept that an indemnity provided by the sole shareholder of the company is an asset of the claimant and must therefore be taken into account when assessing whether there is reason to believe that the claimant will be unable to pay the costs of the defendant.

“But where the answer to that question would otherwise be in the affirmative such an asset will not, save perhaps in an exceptional case, cause the answer to be in the negative. That is because a sole shareholder cannot, for the reasons I have given, be regarded as a reliable source of litigation funding.”

This case was not exceptional. “Mr Dunn has undertaken no obligation to the defendant. If in March/April 2018 the claimant is ordered to pay costs to the defendant, Mr Dunn might consider that the liquid assets of his companies could, at least temporarily, be put to what he might regard as a more profitable use than paying the costs of the defendant.

“It is therefore not fanciful to suggest that he might procure that the claimant does not call upon him to honour his indemnity. By so doing he would break no contractual duty owed to the defendant, because there is none.”

The defendant’s counsel asked rhetorically why Mr Dunn would not pay in circumstances where refusal to pay would lead to judgment being entered against him and the judgment being executed on his assets.

The judge responded: “[Mr Dunn] may prefer to let the defendant wait for its costs so that he can take advantage of a business opportunity and avoid the loss of his assets by execution by paying the costs before any irrevocable loss is enforced upon him.

“That realistic possibility would mean that there is reason to believe that the claimant will not pay the defendant’s costs because the authorities show that the relevant time for payment is the time when the costs fall due for payment… Delay might also be caused by the steps he envisages taking in order to pay the costs.”

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